Produce Pay, Inc. v. Izguerra Produce, Inc.

39 F.4th 1158

PRODUCE PAY, INC., Plaintiff-Appellant,

v.IZGUERRA PRODUCE, INC. ; Sergio B. Fierro; Carlos F. Fierro; Maria T. Fierro; Does, 1 through 10, inclusive, Defendants-Appellees.

No. 20-56181

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 7, 2021 Pasadena, California

Filed July 8, 2022

Robert M. Brochin (argued) and Clay M. Carlton, Morgan Lewis & Bockius LLP, Miami, Florida; Thomas M. Peterson, Morgan Lewis & Bockius LLP, San Francisco, California; for Plaintiff-Appellant.

Maurice Wainer (argued), Snipper Wainer & Markoff, Beverly Hills, California, for Defendants-Appellees.

Rebecca K. O'Brien and Jonathan M. Saffer, Rusing Lopez & Lizardi PLLC, Tucson, Arizona; Robert M. Warzel, Rusing Lopez & Lizardi PLLC, Scottsdale, Arizona; for Amici Curiae Delta Fresh Sales LLC and Chucho Produce LLC.

Before: Paul J. Kelly, Jr.,^* Milan D. Smith, Jr., and Danielle J. Forrest, Circuit Judges.

Opinion by Judge Kelly ;

Dissent by Judge Milan D. Smith, Jr.

KELLY, Circuit Judge:

Plaintiff-Appellant Produce Pay, Inc. (Produce Pay) appeals from the district court's dismissal of its federal claims with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). In its complaint, Produce Pay alleged that Defendant-Appellee Izguerra Produce, Inc. (Izguerra) violated several provisions of the Perishable Agricultural Commodities Act (PACA), and it also brought several state-law claims. After dismissing Produce Pay's PACA claims, the district court declined to exercise supplemental jurisdiction over the state law claims. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse and remand for further proceedings.

FACTUAL AND PROCEDURAL HISTORY

As alleged in its complaint, Produce Pay is a Delaware corporation that buys and sells wholesale produce internationally through its online platform. It also offers loans and advances to growers to fund the planting, cultivating, shipping, and marketing of crops. Produce Pay holds a PACA license issued by the United States Department of Agriculture (USDA).

Relevant here, growers, often in Mexico, post to the online platform when they have produce to sell and distributors, such as Izguerra, can arrange for the produce to be shipped to them. The distributor then distributes the produce to various retail outlets. Produce Pay obtains title to the produce, but because of the perishable nature of produce, the produce is shipped directly from the grower to the distributor in the United States. Upon receipt of the produce, the distributor then informs Produce Pay how much of the produce is marketable, and Produce Pay pays the grower. The distributor is then responsible for reselling the produce on consignment and must remit the gross proceeds to Produce Pay less the distributor's commission and any permissible expenses or deductions. In addition, Produce Pay charges the distributor a "marketplacing commission" when the distributor connects with new growers through Produce Pay's online platform. This system, which amici contend is typical for the industry, "facilitates the movement of produce from farm to market," in an international industry where "there is often little time to draft and sign formal contracts" because of the perishable and unpredictable nature of the products. Amici Curiae (Delta Fresh Sales, L.L.C. and Chucho Produce, L.L.C.) Br. at 7 (quoting John F. Munger, Importation of Mexican Produce into the United States: Procedures, Documentation, and Dispute Resolution , 30 Ariz. J. Int'l & Comp. L. 605, 607 (2013) ).¹

In January 2019, Produce Pay and Izguerra agreed that Izguerra, through Produce Pay's online platform, would receive and accept produce from a grower and subsequently sell the produce to retailers on Produce Pay's behalf. While the parties' agreement—titled the Distribution Agreement—stated that Produce Pay would retain title to the produce before it was sold on consignment by Izguerra, Produce Pay limited its risk in the event that Izguerra failed to sell any of the marketable produce.

For example, if Izguerra could not sell the produce at an expected price, Izguerra was still responsible for a "marketplacing commission" and Produce Pay reserved the right to recover its commission from other produce shipments accepted by Izguerra. In addition, the parties' agreement provided that Izguerra bore any default risk regarding purchasers of the produce.

In April 2019, Izguerra bought 1,600 25-pound cartons of avocados from Produce Pay through its online platform. Pursuant to the parties' agreement, Izguerra received the avocados directly from the grower. Izguerra then confirmed its receipt and approval of the shipment on Produce Pay's online platform. Produce Pay subsequently issued Izguerra an invoice for the avocados for $70,560.00. This amount represented the net proceeds from the avocados. Produce Pay's invoice reiterated that the avocados were sold "subject to the [PACA] statutory trust."

Izguerra never fully paid Produce Pay and had an outstanding balance of $63,786.56 by November 2019. Consequently, Produce Pay filed suit and alleged several claims under PACA. The district court granted Izguerra's motion to dismiss with prejudice concluding that as a matter of law Produce Pay was not a seller of wholesale produce and thus not entitled to PACA protections. Specifically, the district court applied the transfer-of-risk test articulated by this court in S&H Packing & Sales Co. v. Tanimura Distributing, Inc. , 883 F.3d 797, 813 (9th Cir. 2018) (en banc), and found that the transaction between Produce Pay and Izguerra was a secured loan rather than a true sale. The district court recharacterized the transaction as a secured loan because Izguerra bore all the risk if one of its purchasers defaulted, Izguerra was liable for damages for a variety of adverse contingencies that might result in non-payment, and Produce Pay reserved the right to collect deficits from its other transactions with Izguerra.

On appeal, Produce Pay argues that the district court erred by not crediting Produce Pay's well-pled factual allegations which it maintains state a plausible PACA claim. Produce Pay also objects to the district court's recharacterization of the transaction from a sale to a secured loan. Finally, it maintains that dismissal without leave to amend was improper given the liberal policy favoring amendment.

DISCUSSION

A. Standard of Review

This court reviews the dismissal of a complaint under Rule 12(b)(6) de novo. Applied Underwriters, Inc. v. Lichtenegger , 913 F.3d 884, 890 (9th Cir. 2019). "In so doing, we accept all well-pleaded factual allegations in the complaint as true and construe the pleadings in the light most favorable to the plaintiff." Walker v. Fred Meyer, Inc. , 953 F.3d 1082, 1086 (9th Cir. 2020). However, "we ‘need not ... accept as true allegations that contradict matters properly subject to judicial notice or by exhibit.’ " Gonzalez v. Planned Parenthood of L.A. , 759 F.3d 1112, 1115 (9th Cir. 2014) (quoting Sprewell v. Golden State Warriors , 266 F.3d 979, 988 (9th Cir. 2001) ). Dismissal is improper where the complaint alleges "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

B. Produce Pay plausibly alleged that it was a seller or supplier under PACA.

PACA was enacted in 1930 to prevent unfair business practices and create stability and financial responsibility in the fresh produce industry.

Perfectly Fresh Farms, Inc. v. U.S. Dep't of Agric. , 692 F.3d 960, 963 (9th Cir. 2012). PACA prevents dealers or commission merchants, like Izguerra, from failing to pay in full promptly for any produce they receive in interstate commerce. 7 U.S.C. § 499b(4). Additionally, PACA requires produce held by a commission merchant or dealer to be held "in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction." 7 U.S.C. § 499e(c)(2). Thus, as a preliminary matter, Produce Pay must allege the following to state a PACA claim:

(1) the commodities sold were perishable agricultural commodities, (2) the purchaser was a commission merchant, dealer, or broker, (3) the transaction occurred in contemplation of interstate or foreign commerce, (4) the seller has not received full payment on the transaction, and (5) the seller preserved its trust rights by including statutory language referencing the trust on its invoices.

Sun Hong Foods, Inc. v. Outstanding Foods, Inc. , No. CV19-10121, 2020 WL 2527048, at *3 (C.D. Cal. Mar. 26, 2020) (quoting Tom Ver LLC v. Organic All., Inc. , No. 13-CV-03506, 2015 WL 6957483, at *8 (N.D. Cal. Nov. 11, 2015) ). See generally Sunkist Growers, Inc. v. Fisher , 104 F.3d 280, 282–83 (9th Cir. 1997).

Here, Produce Pay has alleged these five preliminary elements. The avocados are perishable. Izguerra is a dealer of avocados. The transaction involved a grower in Mexico; a California dealer; and Produce Pay, which is a Delaware corporation, and therefore occurred in contemplation of interstate or foreign commerce. Produce Pay has alleged an outstanding balance of $63,786.56. And finally, the initial invoice for the avocados states that the avocados were sold "subject to the [PACA] statutory trust." The point of contention is whether Produce Pay was an "unpaid supplier[ ] or seller[ ]" under PACA.² 7 U.S.C. § 499e(c)(2). While PACA protects the interests of suppliers and sellers of produce, it does not protect the interests of parties who are only lenders. See Tanimura , 883 F.3d at 802–03. Izguerra contends that Produce Pay was not a seller because the avocados were sold to Izguerra directly by the grower.³

We conclude that Izguerra's characterization of the transaction is at odds with Produce Pay's allegations and incorporated exhibits, which we must construe in Produce Pay's favor. See Walker , 953 F.3d at 1086. Produce Pay alleges facts that resemble a consignment...